Our friendly and approachable employment lawyers can provide all the advice you need about IR35.
IR35, or the off-payroll working rules, applies to contractors, clients (referred to as the ‘end client’ or ‘end user’) and their intermediaries. The purpose of IR35 is to establish whether a worker is employed or self-employed for the purposes of tax.
In April 2021, new IR35 rules affecting the private sector came into force. Businesses and contractors via their personal service companies or other intermediaries should be prepared to address existing contracts and amend their approach to new contracts.
The rules are complex and sometimes confusing, but HMRC will continue to take action against those it considers should be paying tax as an employee. It is vital to accurately determine IR35 status and the responsibility of each respective party to avoid issues with HMRC and the organisations and people you do business with.
At BakerLaw Solicitors, we are employment law specialists with substantial experience advising workers, personal service companies and end clients in relation to the off-payroll tax rules. We can help individuals and businesses navigate their obligations, ensuring full compliance and eliminating the risk of dispute with HMRC.
Our IR35 expertise
Our specialist IR35 solicitors’ expertise includes:
- Drafting and reviewing contracts between workers’ personal service companies (or other intermediaries) and end users.
- Drafting and reviewing contracts between workers and personal service companies.
- Assessing whether a work contract falls inside or outside IR35.
- Providing advice about status determinations and challenging determinations.
- Advising in relation to HMRC IR35 investigations.
What is IR35?
IR35 is also known as the off-payroll working rules.
The purpose of IR35 is essentially to assess whether a contractor (which can be a tax efficient way of working) is actually a contractor or whether they are an employee who has been ‘disguised’ as a contractor for the purposes of tax.
The off-payroll rules apply if a worker provides services through their own personal service company or some other intermediary – such as a partnership, another personal service company or an individual – to a client.
A personal service company (PSC) tends to refer to limited companies that have a sole or majority director-shareholder who is responsible for providing the company’s services.
It is the client’s responsibility to work out whether the off-payroll working rules apply to their particular working relationship.
If the rules apply, Income Tax and employee National Insurance contributions (NIC) can be deducted from the worker’s fees and paid to HMRC along with employer NICs and (if applicable) Apprenticeship Levy.
How do I know if I am an employee?
Even where a PSC is in play, the relationship between end client and worker may actually be more like employer-employee. This type of worker is referred to as a ‘deemed employee’.
IR35 law looks to identify deemed employees and ensure they are taxed appropriately, such that, IR35 ensures that the worker pays the same Income Tax and NICs as employees.
‘Outside IR35’ and ‘inside IR35’
If your work contract falls outside IR35, you are considered self-employed for tax purposes and you can take advantage of all the tax efficiency of being a contractor (along with all the risks).
If your work contract falls inside IR35, you are deemed employed for tax purposes.
Finding out whether a worker is an employee for tax purposes
Generally, the rules are likely to apply if you are:
- A worker providing services directly to an end client via a PSC.
- An end client receiving services directly from a worker via a PSC.
- An agency providing services to an end client via a worker’s PSC.
However, it is important to check your IR35 status with a legal professional who specialises in this area to make sure that you are compliant. Taking extra caution now could prevent lengthy and costly disputes with HMRC further down the line.
Legal tests for employment
IR35 has become a complex area of law over the years, and the recent changes to the rules only seek to make the situation more confusing.
Ensuring that the contract between the PSC (or other intermediary) and end user reflects a contractor/end user relationship rather than indicating an employee/employer relationship is essential to avoid disputes with HMRC.
There are various legal tests for employment that can be applied to work contracts to establish whether IR35 applies, including:
- Supervision, direction and control – contractors tend to have freedom over how they undertake their work. For example, a contract may indicate employment if it controls things like the worker’s working hours and how much oversight the end client has.
- Mutuality of Obligation (MOO) – does the end client have an obligation to offer work and does the worker have an obligation to accept the work? If so, this may indicate an employment contract rather than a contract for services.
- Substitution – if a worker is not allowed to send a substitute to complete work on their behalf, this may indicate employment rather than a general contract for services.
- Equipment – contractors will typically use their own equipment to complete work. Although this is not always the case (for example, there may be a health and safety reason as to why the contractor uses the end client’s equipment), but could indicate employment.
- Intentions of the parties – the contract should ideally clarify the contractor and end user’s intentions when entering into a work arrangement. For example, that the intention of the contract is to establish a supplier/client relationship rather than an employee/employer relationship. Where the contract is silent on intentions, this can sometimes make a dispute with HMRC harder to resolve.
- Integration in the end user’s business – the level of the worker’s integration into the end client’s business can affect whether they are employed or self-employed for tax purposes. For example, a worker who volunteers for work unrelated to their contract or has other staff reporting to them may be perceived as ‘part and parcel’ of the end client’s business and therefore an employee.
- Invoicing and finances – being paid a guaranteed weekly or monthly fee can resemble an employee’s salary in some circumstances. A contractor should ideally issue invoices for project milestones rather than relying on guaranteed payments.
- Project completion – in relation to the above, contracts should ideally refer to projects or completion of a piece of work rather than simply by a period of time. In addition to details about payment, penalties and additional charges for late work or underdelivered projects also indicate a contractor/end user relationship rather than employee/employer.
- Playing the field – a contractor using a PSC will not usually be bound to one individual end user but free to work for many.
It is also typically beneficial for a contractor to have an employment contract in place between themselves and the PSC. The main thing to ensure is that the contract does not link the PSC too closely with one particular end client.
Who is responsible for working out IR35 status?
From April 2021, workers working via PSCs in the private sector can no longer set their own IR35 status, unless the end client is a small business.
For medium to large businesses, whether the worker is in the public or private sector, it is now the responsibility of the end client to work out whether the worker falls inside or outside of IR35.
An end client will be a small business if they meet two of the following requirements for two consecutive financial years:
- They have an annual turnover of up to £10.2 million.
- They have a balance sheet total of up to £5.1 million.
- They have no more than 50 employees.
If the end client is a small business, it is the contractor’s responsibility for working out their own employment status. It is therefore important to communicate clearly with your client or worker to establish whose responsibility it is to work out IR35 status.